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Social Security benefits are indexed to inflation. If prices go up in general by
5%, then retirees will get an automatic "pay raise" of 5% the next year. Seniors
have received these automatic cost-of-living adjustments (COLA) increasing their
social security benefits each year since 1975. Next year, for the first time in
34 years, there will be no COLA adjustment because the recession has reduced
overall demand in our economy, and instead of inflation we have experienced a
slight deflation with a small decrease in "overall prices". The Congressional
Budget Office (CBO) projects that there will be no cost-of-living increase in
2010 or 2011, and only a 1.4% increase in 2012.

Is this a problem? Normally, our nation's seniors would be just as well off as
they were before if their government pension remains constant as long as their
expenses remain constant as well. However, the national consumer price index(CPI-W) from which Social Security's COLA is calculated does not necessarily reflect the expenses of seniors. The Bureau of Labor Statistics determines the national consumer price index each month by observing the price of a predetermined basket of goods and services typically purchased by households of wage earners. These households reflect 32% of the total population and exclude "professional, managerial and technical workers, the self-employed, short-term workers, the unemployed, retirees and others not in the labor force." The deflation we have currently been experiencing has been driven in part by falling energy prices, used vehicle prices and technological advances. For example, when faster computers come to the market, the old, slower computers are sold at rock bottom prices, so the Bureau of Labor Statistics reports a reduction in the cost of computing.

Retirees tend to spend less money on transportation, computers, games and other electronic gadgets which have been going down in price recently. However, they do spend a large part of their income on health expenses. According to
Rep. Carolyn McCarthy (D-NY), "While inflation may not have gone up since last year, costs for seniors, especially their healthcare costs, are increasing dramatically. Medicare Part B costs, for example, have gone up by an average of 7.8 percent over the last five years and are projected to rise in 2010 by as much as 9 percent. Furthermore, seniors largely live off investment income, many of which have seen staggering hits as a result of the economic downturn."

In order to address this crisis, Rep. McCarthy has introduced a
bill to provide the over 50 million individuals receiving Social Security checks with a one-time payment of $150 in lieu of the Social Security COLA in 2010.

I believe this is an excellent step in the right direction, but it is somewhat short-sighted. The bill will address the problem for 2010, yet the problem will likely remain in 2011 according to CBO inflation forecasts. This is especially true if meaningful healthcare reform is delayed and healthcare costs continue to spiral out of control.
It is conceivable that at some point in the future, the converse situation might arise; that is, seniors may be fortunate enough to keep their expenses under control while expenses for the working population experiences inflation. Such a situation would be equally unfair.

A solution to both these scenarios would be for Congress to direct the Bureau of Labor Statistics to calculate a variant of the consumer price index to model the expenses typically incurred by seniors, just as they already calculate variants specific to various geographical regions, and a variant (called CPI-U) for the broader class of all "urban consumers”. This "Social Security Consumer Price Index" or CPI-S could be used as a better guideline against which to determine social security benefits.